Cost-Cutting Is No Panacea for High-Tech Growth

In recent years, many high-tech companies have faced enormous challenges as they try to increase sales and profits, meet other financial targets, and satisfy Wall Street's expectations. Because many poor-performing companies have not met these goals, a consulting firm AlixPartners has concluded that if the high-tech industry wants to strengthen its financial position, the industry must cut overhead by up to $50 billion, as well as adopt an asset-light operating model.

While I can agree that finding ways to cut wasteful spending while still maintaining or creating greater efficiency makes sense, the evidence shows that many companies have already tried cutting overhead costs and have outsourced many parts of their business operations, but these measure do not guarantee success.

Instead of viewing cost-cutting measures as a panacea that will address the high-tech's poor sales performance, companies within the industry should focus on the much more salient issues surrounding the need to develop technologies that meet the demands of a consumer market whose tastes, needs, and expectations have changed and continue to evolve.

To my mind, the report's recommendation that slow-growing companies cut their sales, general, and administrative costs by as much as 30 percent simply means more company layoffs, reduced spending on R&D, capital expenditure, and other operational activities that could spark the much-wanted revenue increase.

Let's face it: When high-tech companies don't meet their revenue targets, often because their technology can't compete in the marketplace, the knee-jerk reaction is to lay off workers, shut down parts of the business, outsource or sell business operations, or even sell the entire business to another company.

We've seen this movie before. In May, Hewlett-Packard Co. (NYSE: HPQ) announced plans to lay off 27,000 employees over the next two years, as it seeks to turn around its fortune. These plans will amount to nothing, however, if HP doesn't follow up with a strategy that would help it compete in the tablet market, the enterprise products and services space, or the PC market where China's Lenovo Group Ltd. replaced it in the third quarter as the world's number one vendor.

In June, Finnish phone maker Nokia Corp. (NYSE: NOK) announced it would lay off 10,000 employees to boost its financial position that has been weakened by lackluster sales of its smartphones, the result of its inability to compete with Apple and Android products. And Google said it would cut 4,000 jobs from Motorola Mobility, a company that it acquired with the objective of growing its market share in the mobile device market.

Other technology companies like Research in Motion, IBM, and Dell have all announced plans to cut operating costs, but no one believes that slashing the number of employees or cutting other overhead costs are the only decisions that will likely lead to a revenue resurgence for each of these companies.

Today, the high-tech industry is moving through an epic transformation -- from desktop computers and laptops to tablets and smartphones. Big-data is on the rise, and more sophisticated technology such as cloud computing and advanced business intelligence software is being offered. With regard to tablet technology, mobile applications for business users and consumers alike have made great strides.

What we are witnessing is a more competitive landscape that requires companies to think about what their core business is, how their business should change with the times, and what products will keep current customers happy while luring new clients to new technologies that meet business and consumer needs.

For those companies that have not kept pace with change, the AlixPartners report "The 2012 AlixPartners Global Telecom and Technology Outlook" confirms what we already know. Based on the 1,173 companies across 10 major high-tech sectors that researchers examined, the analysis showed that the high-tech industry's growth rates have fallen to 2 percent during the 12-month period ended June 30. This is a dramatic reduction from the two-year period beginning in 2009 to 2011, during which the average growth rate was 10 percent.

Breaking the numbers down further, the analysis revealed that consumer electronics saw revenues decline by 8 percent, while telecommunications equipment and semiconductors suffered a 1 percent and 3 percent drop, respectively. Together, these three sectors make up 20 percent of the high-tech industry.

However, the one company that stands out from the crowd is Apple Inc. (Nasdaq: AAPL), according to AlixPartners:

At first glance, it appears that the high-tech industry as a whole outperformed broad market indices in terms of market capitalization (excluding dividends) this year through August 31. But, if we exclude just one company, Apple, Inc., we see that market-cap for the high-tech industry grew just 6% during that period. That trails both the NASDAQ Composite Index and S&P 500 averages, which grew 16% and 8%, respectively, in the same period.

This bolsters my point. I have not seen any significant cost-cutting measures, such as layoff plans from Apple, during the last five years. If anything, Apple has expanded its sales force and opened new retail stores both in the US and in global markets. Yes, Apple continues to adopt an asset-light business model that involves reducing in-house business tasks and relies on outsourcing opportunities. We agree that Apple is a successful company, in part because it uses Foxconn for its contract manufacturing needs. It should be pointed out, however, that Dell and HP also use Foxconn, so this is not necessarily the answer. What stands out about Apple is that it has continued to develop products that consumers line up to buy.

My takeaway from reading this report is simply that the recommendations fall short of providing answers to the complex problems that the high-tech industry is facing today. Cutting overhead costs and relying on outsourcing business operations to save money is not a cure for what ails the high-tech industry today. If anything, high-tech companies need more investments in R&D, greater innovation, more qualified engineers to develop products that people can find useful, and a better strategy to compete on price. Put all these things together and you'll have not one but multiple companies like Apple.